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Installment Loans vs. Revolving Credit: How They Compare

Having different kinds of debts shows lenders that you can easily manage multiple debts. However, you need to properly pay the creditors to leave a good impression on future lenders and positively impact your credit score.

Most of the time, the variety of debts you owe fall under two categories: installment loans and revolving credit.

How Do Installment Loans and Revolving Credit Differ

Before you decide on borrowing money, it is vital to know how your debt works. You need to know first if the debt is a revolving credit or an installment loan. Both credit categories differ in many ways.

Installment loans are the type of loans with a fixed amount and are paid back based on a set schedule agreed upon by the borrower and the lender. On the other hand, revolving credit will let you borrow money up to a specified amount.

After you pay it off monthly, you can continue to borrow more money as long as you don’t exceed the limit.

How Borrowing Works

Lenders such as banks, credit unions, and online lenders offer installment loans. It can be applied in person or through an online application. Common examples of installment loans are personal loans, car loans, and mortgage loans.

Installment loans usually have fixed interest rates. This means you will be aware of how much interest you will pay monthly and in total. On the other hand, some lenders offer installment loans at variable rates.

If you choose an installment loan with a variable rate, your loan’s interest rate will be based on a financial index, but your repayment schedule is still fixed.

Installment loans are usually paid every month. With an installment loan, you will know when to pay and when your debt ends. On top of that, if you opted for a fixed-rate installment loan, you will know the total cost of your loan.

This means you will be very aware of your debt situation, with no surprises or whatsoever.

With revolving credit, you will be given a borrowing limit. With that limit, you can choose to use only a small portion of your line of credit. Common examples of revolving credit are credit cards and equity lines of credit.

Suppose you are given an $8,000 home equity line of credit, and you might want to use only $1,500 from it. After you repay that $1,500, the credit will be available for your use again.

Some revolving credit is open-ended. This means your credit line will stay open as long as you want to. That way, you can borrow money and pay it back forever.

This is true when it comes to credit cards. On the other hand, some revolving debts are only available for a limited period, such as eight years. This is the case for home equity lines of credit.

When Can You Access Funds

You can get a lump sum of money when you take out an installment loan. If you asked for $15,000 in an installment loan, that same amount would directly be deposited to your bank account or through check. If you want to borrow more money, you’ll need to apply for a new loan.

A revolving debt lets you choose when to borrow money. You can opt to borrow right after opening an account or wait for a couple of months. It entirely depends on your choice.

However, if you don’t use your card for quite too long, you might end up losing your card due to inactivity. As long as you don’t exceed your credit limit, you can continue to borrow money and pay it off. 

How Repayment Works

As mentioned earlier, installment loans have a predictable repayment schedule. Before you could get the loan amount, you and the lender will agree upon how often you will make payments and how much you will pay.

If you choose a fixed-rate loan, your payment will not change over time. Suppose you borrowed money on a six-year term, and your payment per month starts at $200. Six years from now, you still have to pay $200 monthly.

When it comes to revolving debts, your repayments will entirely depend on how much you borrowed. This means, if you haven’t borrowed money yet, you don’t have anything to repay. Most of the time, revolving debts are paid per month. However, you can choose to pay a portion of what is due.

Takeaway

If you can juggle having an installment credit and a revolving credit simultaneously, that’s okay. Just make sure you properly manage your debts, which means on-time payments with no problems.

Having both credit types can boost your credit score and give you an excellent chance to get approved for another loan or credit in the future.

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